The New Global Finance Capital Elite

A practice and loophole that emerged around 2008, US corporate tax ‘inversions’—the latest version in a long list of US transnational corporation tax scams—have taken off in 2014. A tax inversion is set in motion when a US based corporation buys another company offshore and then manipulates the tax codes of both countries to extract the greatest net tax reduction. The United Kingdom, Ireland, Switzerland and others are favorite locales for ‘inversions’ of late. And US corporations and industries at the forefront of this new wave are typically pharmaceutical, technology, cable tv, entertainment, medical equipment, finance, and related retail companies—with many others waiting in the wings as well.

Briefly, here’s how it works: After purchasing an offshore company, the US company then designates its global headquarters as located in the new country of its purchase. With its headquarters now outside the US, the company can now transfer profits made in the USA, via various ‘intra-company price transfer’ tricks, to the foreign based headquarters and country where effective tax rates are lower and where various US tax code offshore loopholes are available to US transnational corporations. The US purchasing company can also transfer its offshore debt from the purchased company to its US operations in turn. The higher debt and resulting higher interest payments on that debt are deductible from US corporate taxes, according to US tax law. The ‘inversion’ deal thus provides a double tax cut advantage to the US corporation. But that’s only the beginning.

The gains to be realized are not only from US tax code manipulation by the purchasing non-financial corporation. Shadow bankers and their financial speculators (i.e. hedge funds, private equity firms, investment banks, insurance companies, etc.) are also big beneficiaries of the Merger & Acquisition process at the heart of what appears on the surface, in the case of the tax inversion, as ‘just’ another transnational US corporate tax scam.

Lower taxes for the US corporation from the inversion means more retained corporate cash on hand, and the prospect of more future earnings as well, all of which in turn drives up the company’s stock price. That makes the company even more attractive to investors like hedge funds and equity firms, which buy up big blocks of both the purchasing and purchased companies’ stock. Banks and shadow bankers that jump into the process at the outset, buying up company stock in the process, also provide original funding for the company’s purchase. Others jump into the stock as the acquisition deal proceeds. Once concluded, early and latecomers both then reap a nice capital gain from the eventual stock price appreciation that almost always follows the deal.

So the profits gained are not just from tax reduction for the US purchasing company, but are financial and related to asset price speculation associated with the ‘tax inversion’ process and acquisition itself.

The practice of inversions gained public attention earlier this year with the US drug giant, Pfizer, attempting to purchase the UK drug firm, Astrazeneca. Pfizer offered more than $69 billion to purchase Astrazeneca, but was rebuffed by the latter’s shareholders, who wanted even more.

The key role of hedge funds and shadow bankers in the Pfizer-Astrazeneca deal was clearly evident from the start, since Pfizer did not put up the lion’s share of its $69 billion offer for Astrazeneca from its own retained cash. The big block of financing was to come from its hedge funds and other shadow banker partners and outside investors.

In many cases hedge funds (aka Vulture Funds) and other shadow bankers are the initiators and instigators behind the acquisition. They are at the forefront, prodding US corporation managements to ‘invert’. A good example is the recent case of Walgreen, the US drug retailer. Its major investor, the hedge fund, Jana Partners LLC, pushed hard for Walgreen to move its headquarters to Switzerland or the UK. This kind of pressure from funds like Jana Partners makes it difficult for corporate CEOs to resist, since the hedge fund can always turn to the company’s stockholders and have them put pressure on the management to do the deal, if they don’t want to deal with a stockholder ‘revolt’ and want to keep their corporate jobs. Major stockholders see the opportunity for significant capital gains from stock appreciation in tax inversion deals, and together with the Hedge Funds demand that management undertake the corporate purchase and headquarters relocation.

In other words, while it appears that corporations gain at the public taxpayer expense through corporate tax reduction—which they clearly do—even greater gains come from financial speculation that benefit investors, big shareholders, and senior management of the purchasing company as well.

In the Walgreen case, last week it was announced that Walgreen was backing off the purchase—for now. The timing was not right, apparently, coming just before a midterm election in the US for a company dependent on US government subsidies to its customers with which to buy its drugs. But the hesitation by Walgreen is probably temporary, to resume after the November elections when the ‘tax inversion’ loophole gets addressed in comprehensive US corporate tax revision legislation that US corporations have been demanding of the Obama administration and Congress for several years now.

Corporate managers as well as hedge fund speculators benefit nicely from tax inversions. They are typically offered a ‘sweet incentive’ by their hedge fund investors and other big shareholders to do an inversion deal. So it’s not just the possible threat of a stockholder revolt, instigated by the company’s in house big fund investors, that incentivizes more corporate managers to jump on the tax inversion bandwagon. Senior managers stand to gain greatly as well from stock price appreciation in the wake of the deals. Often their personal income tax bill from selling their own personal stock holdings after the company’s stock price rises from the deal is covered by their companies. Their own personal capital gains from the deals is often ‘grossed up’ by their company (i.e. paid for out of the company’s earnings) as part of the deal.

So all levels of financial speculators benefit from these ‘inversion’ deals—shadow bank investors, hedge fund managers, big stockholders, and top corporate managers with significant stock holdings and compensation—all realize big capital gains from stock price manipulation that is at the core of tax inversion deals. Again, it is not just about tax avoidance; it is about stock price manipulation and huge capital gains. Long term the benefits for the company may be from corporate tax reduction; but short term the big speculative profits rip-off is from engineering stock speculation and other forms of financial manipulation.

In the past year there has emerged a veritable ‘wave’ of corporate inversion deals erupting. And the potential loss to US corporate tax revenue, should the trend continue, is considered significant by many estimates. The Obama administration this past summer raised the possibility it may support legislation to curb the practice. But the political outlook of such before the midterm elections in November 2014 is practically nil, so far as passage of legislation to check the trend is concerned. While bills have been introduced earlier this year by a few liberal Senators, the Obama administration so far has been mostly just talking about supporting such legislation, or offering proposals tweaking the requirements for allowing inversions, not actually preventing them. What’s going on politically in the administration and Congress is therefore just ‘grandstanding’ to make it appear they are concerned. Nothing will happen before the November midterm elections.

Political elements of both parties in the USA are eyeing the period after the election, during which the US tax code and general corporate tax revisions and cuts will be taken up. An institutionalizing of rules governing corporate tax inversions going forward will undoubtedly be part of that comprehensive corporate tax revision. Tax inversions are not going away; they have only just begun.

The ‘inversion’ trend is another example of the growing dominance of the global finance capitalist elite, who are deeply entrenched in the USA and UK in particular, but worldwide growing in terms of numbers and absolute wealth as well.

This elite is deepening its control of nonfinancial companies and are increasingly directing those companies increasingly toward profits growth from financial manipulation as the primary corporate activity—in this case ‘inversions’ and corporate mergers and acquisitions activity.

Instead of making profits by making real things that require real investment and the employ real people, the focus of global capitalism is increasingly toward more financial asset investment—i.e. investment that produces even quicker, more lucrative profits growth than old fashioned ‘real’ investment that makes things that creates jobs and income for people to buy the things.

Global capitalism is growing progressively less interested in making things for profit than it is in generating forms of money capital as profit. Those engaged in financial asset investment (i.e. financial elite) are therefore accruing an ever larger share of global income and wealth for themselves, while those who were once participating in investment producing goods are finding their share of income in steady relative decline.

Global shadow banks now control more than $70 trillion in investible assets, according to such ‘radical’ sources as the Financial Times global periodical. And very high net worth investors, about 200,000 individuals worldwide with annual income flows of $30 million or more from existing assets—i.e. the new global finance capital elite—now own close to half of that $70 trillion in investible assets. And their assets are projected to rise another $10 trillion by 2017.

Inversions’ and related M&A activity are but one example of a growing emphasis of global capitalism on financial forms of speculative ‘investment’ in the 21st century. Inversions are but the latest example of this global relative shift toward financial speculative investing.

The growing shift by non-financial corporations toward ‘portfolio’ investing; the growing trend toward speculating in M&A, derivatives, old and new forms of bonds, dark pools of stocks, and other proliferating forms of securitized financial securities; the explosive growth of shadow banking institutions worldwide; the spread of liquid financial markets in which to speculate; and the accelerating ranks and assets of very high net worth investors worldwide—two third of whom are located in the US and Europe—are all examples of the new trends in 21st century global capitalism as it shifts toward greater reliance on financial profit making.

US politicians will not only fail to stop inversions, but following the November 2014 midterm elections, watch for both wings of the US Corporate Party in the USA to come together and legislate a new comprehensive corporate tax cut. Included in that new code will be new terms governing future global corporate tax inversions—as well as a likely major reduction in the official US corporate tax rate to 28% or less that has been promised by both Obama and the Republicans for the past two years but has been postponed until the coming November midterm elections.

Jack is the author of ‘Epic Recession: Prelude to Global Depression’ (2010) and ‘Obama’s Economy: Recovery for the Few’(2012), by Pluto Press, London, UK, and the forthcoming ‘Transitions to Global Depression’(2015). He hosts the Alternative Visions radio show on the Progressive Radio Network, and serves as the ‘Shadow’ Federal Reserve Chair, in the Green Shadow Cabinet. His website is www.kyklosproductions.com. He blogs at jackrasmus.com, and tweets at @drjackrasmus.